Fundamental Paper Wealth and Monetary Policy

Abstract: This paper articulates three insights regarding asset prices and monetary policy: (1) Asset price appreciation due to monetary expansion, despite its “paper” wealth nature, tends to make current consumers as a whole wealthier; (2) the wealth effect of monetary policy (on consumption) is negatively correlated with Tobin’s q effect (on investment), which positively depends on investment elasticity; and (3) the soundness of asset market performances does not depend on whether they are fundamental or not, but on their compatibility with the AD-AS balance in the long run. These basic insights and their implications reveal some limitations of monetary policy as a stabilization policy, clarify some misperceptions on fundamental asset prices, and provide a rationale for monetary policy to react directly to asset market performances.

Keywords: Fundamental Paper Wealth; Wealth Effect; Bubbles; Monetary Policy (search for similar items in EconPapers)
JEL-codes: E G (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac and nep-mon
Date: Written 2003-09-01
Note: Type of Document - pdf; prepared on pc; to print on HP/PostScript/Franciscan monk; pages: 46; figures: included
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